The popularity of cash back and other types of reward credit cards is unquestionable. Whether cash, points, or travel miles, every week brings another glitzy offer. But what do these cards really offer, and — perhaps more importantly — what do they really cost?
Cash vs. Rewards
Cash back cards offer a much more transparent payback. For example, buying a kitchen appliance through a points reward program may mean spending the equivalent of $40 in points for a toaster that was on sale last week for $14.99. The same toaster costs $14.99 when purchased with cash back earnings. This explains why cash rewards, at an average maximum of 1.5% of qualifying purchases seem to fall short of the higher rates of reward that often accompany points or travel miles programs. When you accompany that with the fact that almost 35% of points and miles are unused, cash back has a, pardon the pun, redeeming quality, particularly when automatically applied to monthly balances.
And About Those Monthly Balances
Any reward card becomes worthless if you’re maintaining a balance. For cash back cards, you’re not earning savings, you’re simple discounting a bit of the card’s interest rate. If you’re the sort who does regularly carry a credit card balance, no, cash back cards are not worth the effort. Find the lowest interest card you can. That likely means few bells and whistles in cash back, points, or miles, but that’s okay. You’re working to clear the balance, right? You’re not at the point where you’re optimizing your spending, which is what cash back cards are all about.
Beware of Fees
Depending on the card and its program, you may need to pay for the privilege of the cash back card. If you’ve spent $120 a year for that cash back card, it earns you nothing in real terms until you earn $121 in cash rewards. At 1.5% reward, you need to make over $8,000 in eligible purchases annually on that card to earn that single dollar reward. It may still be worth the effort, but not if you’re inclined to spend beyond your means for a minuscule return. Analyze your spending and be honest with yourself before signing on to a cash reward program.